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So, Armando is the CEO of Axiom Founders Family Office, the family CFO and wealth management firm for Arizona founders and their families. As an entrepreneur, Armando has built and exited two businesses, a CPA firm serving closely held businesses and a niche management consulting firm. and he founded the Scottsdale Founders Forum, Arizona’s premier pre-exit event for founders and the founders guidepost podcast and that’s a podcast that’s dedicated to business exit and succession planning
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which as a CPA I can tell you is very very important having exited my own organization. So he is a sought-after speaker and presenter. In fact, he was invited by the FBI to train 400 FBI special agents, all of whom were CPAs, on their own personal financial planning. and Armando has helped oversee $1.5 billion institutional investment portfolio for a major charitable organization and as an appointee of two bishops of the Roman Catholic Dascese of Phoenix. He was responsible for prudent investment
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management and oversight of the dascese institutional investment portfolio. He helped lead the CPA profession in Arizona and nationally. He served as chairman of the Arizona Society of CPAs and served on the governing body of the nation’s largest association, the American Institute of CPAs. For founders seeking an experienced trusted advisor who understands both the financial and personal aspects of wealth and business transitions, Armandanda Roman offers an unmatched combination of expertise, integrity, and a deep
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commitment to family legacy. And I know from personal experience, he walks the talk. So, it’s my pleasure. Please give me or give give join me in giving Armando a big welcome. >> Take it away Armando. >> Thank you Lisa. I appreciate that. And welcome to the Scottsdale Founders Forum. This is our fourth year with the Scottsdale Founders Forum and the event is all about exit. Uh why are you here? Because you have a business. You are an entrepreneur, a founder, business owner. you have a business and you realize that
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at some point you will have to transition out of that company. And that could be through an ESOP, a private equity sale, selling to a competitor, or maybe selling to your adult son or daughter or some other way to get out of your business. And you know, spoiler alert, uh we all die as people. We expire. We have a time frame on us. But the reality is your company does not have to. It can continue. And when you understand what needs to happen for an exit, a successful exit, what that means is a successful transition of your
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company to somebody else for them to own it, them to run it, and them to do what they will do with it going forward. So today is all about the exit and all about you and what you need to know and understand so that you can successfully navigate that exit for you, your company, and your
family. Let’s talk about what you’re going to know today. What you’re going to know is you will know what you need to do ahead of time to plan so that when that time comes, you will be ready and better equipped.
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You’ll know some of the common pitfalls that some people go through as they go through exit. You’ll understand more about the basic anatomy of a sale, what that really means going through that exit, and you will know what professional expertise you need to have on your team so that you have the right exit team for you going forward. What you will have is you will have an opportunity to hear from people who are on the buy side and the sell side of businesses for a living. That’s what
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you’re getting today in this next hour. People who really understand that space and live it and do it and breathe it. Here’s what you’re going to feel. You’re going to feel much better prepared because you’ve been here today. You’ve been hearing from the experts. you’ll you’ll feel better prepared and you will feel a lot more confident in navigating that for yourself because as you understand uh most people go through an exit once it’s a oneandone and there are
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no doovers and if it isn’t done correctly it can be very very costly to your family. So that’s what you’re going to have is much more confidence in this. Um I am the CEO as Lisa mentioned of Axiom Founders family office. We are a multif family office of wealth advisory firm focused on founders, business owners, and entrepreneurs and their families. That’s what we focus on. Uh we’re not an ordinary wealth manage management firm because that is our sole focus. The reason we have this event is
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we had a client a number of years ago go through an exit and it was a pretty significant exit. $25 million. That’s a lot of money for a family. As they went through that exit, I remember having a conversation with their CPA towards the end of the year, and I asked their CPA if he’d had a chance to talk to them about charitable giving and how it could decrease the taxes on this once-ina-lifetime enormous tax bill. And his response was no, he hadn’t talked with them. He was going to wait till the
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sale closed, and then after it closed, then he would bring up charitable giving and have that conversation. That sale closed on December 30th. The next day was December 31st, New Year’s Eve. So, they had a very significant sale, once in a-lifetime sale, without what I thought would have been the appropriate tax planning for them. And when that happened, we resolved that that was not going to happen again to one of our clients. That was the genesis, the creation of the Scottsdale Founders Forum. That’s why you have the experts
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here at the table so that when it comes time for you to have that exit, you’re more informed and you can keep more of that money in your pocket and just have that more successful exit for yourselves. Um, we use the comprehensive process to help our clientele mitigate taxes, preserve their wealth. We help them with investment consulting, charitable giving. We help them transfer their wealth to heirs and help them navigate exit. That’s what we do. We work with the local professional network of
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adviserss so that we have the best of the best in terms of expertise. You’ll meet and I’ll introduce two of them to you here in just a moment who are very much experts in their space. And with that, let me introduce to you our other panelists. We are hosting, by the way, this event in collaboration with the law firm Stella Wilmer. And we have the good fortune of having Brian Bert, a partner here with Stella Wilmer. and he is chair of their emerging business group. And let me go through and just get the um uh
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read to you or introduce him to you. So for over 26 years, Brian Bert has advised entrepreneurs and emerging growth companies in all stages of development from formation to liquidity. He has extensive experience in corporate organization, reorganization and governance, private equity, debt financing, shareholder and owner relations, buyouts and disputes, employment and consulting agreements, employee incentive programs, general contract negotiation, supplier manufacturing agreements, securities regulation, technology
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transfer and licensing, joint venture ERS and strategic alliances, fund formation, cloud computing, corporate asset protection and succession planning and mergers and acquisitions. Having previously founded, raised capital for and run his own company, Brian brings a unique realworld perspective to his business practice. I’m going to repeat that about Brian because this is very unusual for an attorney with his expertise. Having previously founded, raised capital for, and run his own company, Brian brings a
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unique realworld perspective to his business practice. Brian is the creator and host of the firm’s popular emerging seminar program, which has run for the past 16 years. He earned his JD from Harvard Law School where he served as managing editor of the Harvard Journal of Law and Public Policy. Brian, welcome. >> Great to be here. Thank you. >> I’ll introduce now Mark Young. Mark Young is the managing partner and investment and investment banker with CKS Advisors. Mark brings more than 35 years of
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combined experience in investment banking and also known as mergers and acquisitions, corporate finance, and leadership roles to his clients. His expertise includes structuring company sale transactions, capital raises, debt placements, leveraged buyouts, and ESOPS, which are employee stock ownership plans. Prior to joining CKS, Mark held executive positions with money center financial institutions including Maril Lynch and US Bank as well as several regional financial institutions. During his career, he has successfully
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structured negotiated closed a wide range of transactions amounting to more than $2 billion in value. Mark is registered with FINRA as a limited representative investment banking series 79 and series 63. Mark received his MBA from Portland State University and a BA in accounting and finance from Lewis and Clark College. Mark, welcome. >> Thank you. Thank you. Good afternoon. >> Good afternoon. So what we’ll do now is we have questions that that we would like to go through and u Brian I’m going
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to begin with you if that’s okay to ask you a question obviously the people who are here all of you who are listening and tuned in right now are founders owners entrepreneurs you have a company it has great value and may have more value even later depending on where you are on the stage and you want to understand more about exit Brian we’re fortunate to have him here his expert is in M&A and as a business lawyer, he does a lot more. Brian, when should a business owner engage a lawyer? Well,
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certainly uh before you start the M&A process and ideally years before for reasons we’ll talk about throughout the program today, but uh one of the big mistakes we see is people wait until they’re well into the process or they’ve got a term sheet or they’ve even signed something and and by then you’ve missed a lot of opportunity to maximize uh that value for your company. >> Right. And I I’ve I’ve heard Brian some PE owners, business owners tell me that they didn’t want to engage the lawyer
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because they didn’t want to spend $600, $800 an hour until they already knew they were already further along down the path. And uh I imagine you see and hear that at times as well. But you’re saying they really need to engage you sooner, right? >> That’s that’s at least what we’d suggest. There’s a lot of uh pre-planning, corporate cleanup as we call it, that you can do. You mentioned, you know, a situation where your client waited to wait to do some uh charitable planning and uh you know, as as we know,
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for many many business owners, u all if not most of their, you know, net worth is bound up in the business. So, you get one shot at it. >> And if you wait until it’s uh you’re you’re too long too far along in the process, you’ve already made decisions that may implicate uh you know, what you’re going to get out of the the uh deal from a purchase price standpoint. could have risk implications. You didn’t get to do some cleanup that could add value to the uh to the deal. So, there’s
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lots of things that you just don’t get to accomplish and you really impact negatively uh the deal you could have gotten by starting much earlier uh by engaging council and kind of seeing where you’re at and doing that that pre-planning I know we’ll talk about today. >> Yeah. Excellent. Thank you. Mark, a question for you. As as an investment banker, what is your primary role for your clients? >> Sure. Well, the during a transaction process, we wear a lot of different hats. Um, but what we think our primary
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role is to level the playing field between our our clients and the potential buyers. Most of the buyers are very experienced. This isn’t their first transaction. So, they really know what they’re looking for and they really know how how to run a transaction. and most of our clients is is the first time and the last time they’ll sell the company. So, we look to really um level the playing field for them in terms of um how to prepare the company to go to market, how to present the company to go
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to market. um um touching on the high points and making sure they’ve got their ducks in a row and engaging the professionals like Brian uh to help them make sure that their back room is uh uh there’s not any issues that are going to arise. Um so um we play the role of the quarterback most often uh for the major portion of the process um and help them come through it. We’re oftentimes a counselor and a guidance and a pest sometimes to keep them on track uh because they get distracted. Um uh we
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serve as a primary negotiator with the buyer. Um but uh we play a lot of different roles but again we want to level that playing field with those experienced buyers for our clients. >> Okay. Probably a welcome pest. Mark. And you know, Mark, you mentioned leveling the playing field. When a founder goes through a once-ina-lifetime sale and he or she’s up against professional buyers, private equity and such, those people buy and buy and buy day in day out. And it certainly is very unbalanced. They have their
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professionals and experience to work for their shareholders. The founder needs their team as well to help balance that out. That’s what you’re talking about. Correct. >> Correct. That’s our feeling. Um if if nothing else to keep them honest in their approach and to let them know there is a process. So it’s a competitive process. So they don’t feel like they are can strongand the client in the negotiations. Uh that there’s uh there’s people watching and there’s a
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process being run. So we keep them uh plain fair as we say. >> Okay. Good. Thank you. And then I’ll take a question here. The question for me is, what’s the biggest question or concern that you help that firsttime seller address? And in essence, it’s really three words. Are you ready? Are you ready emotionally? Are you ready financially? Are you ready mentally? Because stepping out of that company that you’ve nurtured for 10, 20, 30 years, the company has your fingerprints
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all over it and it’s your baby. I know when I sold my CPA firm years ago, I felt like I was selling one of my children. I have three kids, but this felt like a fourth. And so as we help them understand are they really ready or not. We have to have a good conversation with them. Often it’s a couple we’re having a conversation with and helping them go through a conversation about values and understanding what their values are, what their goals are, who are the people that matter in their life most. And then
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really understanding if they sell that company now net taxes, what’s that going to mean? And how does that chunk of money play into the lifestyle they want? the rest of their lives, the impact they want to have on society, on their church, synagogue, alma mater, etc. And is it really going to work going to work? And so one of the questions that we often wrestle with a bit with them is what is the value of your company? And they they often don’t know. They might have an idea because a friend of theirs
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sold their company for X dollars, but that friend’s company is different from their own company, and they they really don’t know what that value is. Um so again, are they ready? Uh Mark, a question for you again. How is the value of a company determined? >> Well, there’s various ways to value companies and they oftent times are driven by the purpose of the valuation. Uh you you know there’s reasons to value it for estate purposes, for family planning and so forth. But the typical
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way a business is valued uh for a a sale transaction um a formula is used which is u uh comprised of uh cash flow times a multiple and and I’ll go through that and kind of explain what I mean. The cash flow is the excess cash that uh the the company generates. And uh the reason why that’s important for valuation is um the buyers are essentially investors in your company and they’re looking to see what amount of income can be thrown off of your company for their investment return. So they’re concerned about what
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the cash flow is. So that’s one component. The other side of the equation is what we call a multiple and and it’s al also called a multiple of cash flow. And uh the multiples vary from company to company. And um but there’s some factors that typically will influence that multiple. And and those factors range from size of company both from a revenue standpoint or a cash flow standpoint, the ind industry of the company, the type of revenue that it produces, the current market trends, uh forecasts for
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the company. Um we actually go through about 20 to uh 25 different multiple factors go through that with our clients to see which are applicable that will influence the multiple and and each company comes up with a different multiple. So you can have two companies in one industry but based on the characteristics of the company could have completely different multiples. Um but for an example you know a simple example to kind of un understand the formula let’s say a company has 2 million in cash flow and their multiple is six
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times. So their value would be about 12 million in in the 12 12 million range depending on what that multiple is. But a similar company in the same end industry could have a five times or could have a seven times depending on what the characteristics are. >> Yeah. Thank you. And then Mark when when uh you know then then the seems like an obvious question then would be if you’re not quite sure what the multiple is or it’s not clear um when you take a company to market. Are you assuming a multiple and assuming
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a price and and that or how how are you getting folks to really offer their highest value and their highest multiple for that seller? >> Sure. Well, the two things that we do uh on on the front side is we do a a valuation of the company, at least we call it a market valuation. And so we go through that process with our clients >> to give them an idea is typically a range of what we think their company’s worth. And if that range is acceptable to them to go to market with, then we go
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to market with it. We never put a price tag on the company. But um we uh try to shine the best light on the company. So we focus on things that we think will add value to the company. And then we go to a select group of buyers for any of our clients who who are experienced in buying companies in that space. And so they’re going to know what they paid for a similar company three months ago or what they lost a company at three months ago when they were bidding on it. So they’re going to kind of know what the
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market is. Um, but we do our best to really present the company in the best light to shine the light on the things that we we really feel like will show the value of the company. And uh but we don’t go to a market with the price because we have been surprised in the past that we think uh you know a client has a certain value and they’re comfortable with that value. But when we go to market, we find that um uh a certain buyer or group of buyers really want that technology or want that company um and they’re willing to pay
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more. So we would have limited ourselves if we put a price on it. But if they come back less than our value range, then we try to work from there and say, “Hey, you know, we’re thinking it’s worth this. This is our experience.” And we’ll try to lever that up. and and the fact we go to multiple buyers at the same time, they know they’re in a competitive auction position. So, they better give their best bid first to make sure they stay in the game. >> Yeah. And I’ll just recap just a couple
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quick things that you said. You’re going through an auction process. You’re taking this without a price tag to potential buyers for them to determine what they think it’s worth and for them to make an offer. So, you’re not limiting the price by extending a price with your offer. You’re letting them come back to you with the price. So, that uh just want to emphasize the the auction process, how important that is to the seller, to the listener who’s who’s here with us today, that they’re
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take he’s taking your company out to the market without a price, but the auction process helps to bid up the price and get you a better value and better conditions. Brian, a question for you. What why are pre-planning and corporate cleanup so important? >> Sure. So, I think it uh you know part of what Mark and said, I I’ll kind of key off of that. I mean, we’ve seen a number of clients who’ve run companies for, you know, 10, 20, 30 years, never really got a reality check on how that business
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would be valued at sale time. So, they heard from a friend of theirs that sold a company, maybe in a tech space with a higher multiple, hey, I’m going to get, you know, 10 times earnings. And so they’ve lived with that expectation and they again they run their company for a long time and they find out only to wait because they’re in their 60s, let’s say, and they’re it’s time to retire. They’re they’re done doing it. And they find out that they’re going to get a three times
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multiple. And so they’ve not got nearly enough to retire. They’ve kind of paid off some debt, maybe taken a nice vacation, and then they’re back to work, which is a pretty tragic consequence after you’ve been working for decades. We’ve seen that happen over and over again. And so kind of getting that knowledge early on in the process, you know, well before you’re ready to go to market, pretty important. I mean, a second thing in terms of good example would be in corporate cleanup that we
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just had this discussion with a client the other day who’s thinking about selling the company and they’re in a CC corp structure, which is, you know, your your double tax structure. Yeah, >> typically, you know, lots of companies, the majority of companies get sold in a asset transaction, which we’ll talk about a little later. And as a result, you’re going to pay double tax in that structure and, you know, if they have more than, you know, five years, they may be able to elect an S status for
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their company and maybe get rid of that double taxation. And so, you know, no matter whether you’re selling for, you know, a couple million bucks or tens of millions, it’s going to save you a lot of money. But that’s not something >> that you can execute on, you know, two months before you’re ready to go to market. That would be a, you know, an example of how pre-planning years out can save you a lot of tax uh and and, you know, increase the purchase price. And there are many more examples, but
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that pre-planning is going to, you know, uncover those things that are going to help add value and make a deal more likely on the terms you want. >> Yep. Mark, something to add? Uh something to add to my prior point there. Um you know when uh we mentioned we go to the market our initial approach to the market we go with no name um uh which is important. We don’t want to go out to the uh market without the name of the company um or or with the name of the company on the information that we
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initially send. uh we want to um generate some interest in the company and then have them sign in NDAs at that point and then we share the information in more detail with those companies that we wish to share it with and we um discuss those names with our clients before we share more detail. So I just want to make that clear is we don’t broadcast to the market the name of the company. we only share with certain companies who the company is and and that’s that’s is further down the road in the process and
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and we tend to hold back um uh strategic um uh information like customer names and I IP and those sorts of things to the very last because we don’t want to have those things shared but again we don’t share the name when we initially go go out to the market. >> Yeah. And and I remember when I sold my CPA firm, you know, anonymity was just critical. You don’t want your clients or employees to find out that that uh you’re thinking of selling the company. It could be disastrous. Just disastrous.
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So, I’ve got a question that’ll that’ll feel to me. The question is, when the founder is ready to transition out of their business, what steps do they need to do with you? And with us, there’s a lot that needs to happen ahead of time. It’s financial planning, investment planning, tax planning, estate planning, gift and legacy planning, charitable planning. We’ve got to put together a personal balance sheet for them so that we really understand what the assets are. And when we’re putting together a
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comprehensive, holistic wealth management plan for them, when we meet them, often they have this business worth a lot. At some point, that business will sell off and they will have instead cash. Then it’s how do we take that cash and allocate it and invest it in a way that’s going to help them reach the lifestyle they want and the family and legacy goals they want. And that all takes time. So for us there are different points that that matter in what they do with us as they’re going
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through that sale. And again our focus is that family that happens to own a very valuable company. How is the family now when we meet them and how will they be after they go through that exit? And we have to make sure they have the right team of people engaged with them and go through the right steps. So when it’s all said and done, they are not like the majority of people who regret the sale and feel bad about that sale. Instead, they’re in the minority of people who feel really good about what they did and
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how that sale left them at the end of the day. Um, question now again for Brian. Brian, in terms of a sale, is it all about sales price? >> So, that’s what a lot of uh folks going to, you know, sell their company think. It’s it’s all about the price. And so, if I want 10 million and that’s something I’m looking forward to, I I get a an offer for that often times unsolicited, and I’m going to take that, not realizing it’s not just the price, it’s the payment terms. And so there’s a
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number of ways that, you know, buyers will offer to purchase the company. There’s obviously cash at close, and that’s really what I tell every client to focus on. Assume that what you get at close is all you’re getting. And would you still do the deal if that were the case? And so, uh, other opport, you know, options for payment include, you know, a deferred note. And then the question is, is that note going to get paid? Uh, you know, it’s a contractual obligation to do it, but is it secured?
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is the is the buyer going to follow through and actually make the payments? And if it doesn’t, what recourse do you have? And then there’s my favorite, which is the earnout. Um, and I’ve rarely seen those ever pay out. Um, never in full in my career. They are awesome for the buyer because it basically is a situation where the buyer says, and it’s it’s reasonable that they kind of take this approach. They say, “Hey, your business did great under your watch, but I don’t know if the clients
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are going to come over to me. I don’t know if your team is going to stay in place.” And so if you deliver a certain level of uh of revenue or profits, then we’ll pay you uh over the next 2, three, four years, you know, based on those expectations and your projections and kind of what you told us was possible. The problem with that is that you’re not in control of your company anymore. Even though you still may for a short period of time serve as the CEO and so forth, the buyer at the end of the day makes
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all the decisions. And you would think that the interests are aligned. uh unfortunately they’re not. The buyer might have millions of reasons not to want to pay you. And there’s lots of legal ways to avoid doing that. Uh and at the end of the day, uh buyers may just run the company into the ground. We’ve had sales where the buyer had a the seller had a big earnout and the buyer paid, you know, in one case I’m thinking of, you know, 25 million for the company and, you know, five years
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later wanted to sell it back to our client for 5 million. So something clearly went sideways. But point being, you got to figure out what what are these payment terms and what do they look like for you. The final component can be a rollover where the buyer says, “Hey, we want you to have some skin in the game. Take some equity in our company.” And I analogize that to a lottery ticket. You know, it may or may not pay off. It could pay off handsomely, but again, all these deferred pieces, you you need to assume
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you may not get those. Uh and so, are you happy with cash to close? And so that may turn what could be a $10 million offer into a $6 million offer. Or it may mean you take a lower allcash offer than take the risk of a higher cash. And so something that people really, you know, assume it’s all just one number and you really got to factor in these these additional components and what that may mean for you. >> And and Brian, along that line about the earnout, what are you typically seeing?
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How much cash if it’s selling for say 20 million is half of that cash? Is 3/4 of it cash? The rest is an earnout. What does that typically play out to look like? >> Yeah, I mean I’ve seen I’ve seen everything all over the map. I mean I’ve seen recent deals where it was it was half was cash and the rest was in deferred payments or earnouts. I’ve seen situations where it’s twothirds or or three4s cash. I mean it really depends on the deal. It depends on the buyer. It
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depends on what the uh leverage relative leverage is in the deal. I mean, if if the buyer thinks they can exert uh more control over the deal because the seller is a little more um you know, desperate to get things done, maybe they’ve got to sell or there’s been, you know, a situation where they’ve got to pull the trigger sooner than expected. You know, that can drive things. Um you know, how many buyers are in the process? As Mark said, you run a process and if you have 10 buyers excited to buy, well, that’s
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going to hopefully uh you know, leverage better terms, better price, maybe more cash to close. If you’re down to one, which we’ve, you know, seen happen, there’s only really one buyer that’s interested, then, you know, they’re going to have a lot more leverage. So, it’s really all over the map. And I tell the clients, look, come up with, you know, what’s essentially your retirement value because because usually it’s it’s kind of, you know, as we talk, one and
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done. And what do you need to get out of the company to live the type of life you want to live after this deal is over? And uh, you know, make that the cash of clothes. And if you want to take a take a uh kind of a leap of faith with these other components, terrific. You know, maybe you’ll get a lot more uh a little bit down the road and that’s great. But only assume you need to get at closing what it’s going to what’s required to get you comfortable uh in retirement and do all the things that you’re you’re
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looking to do because oftentimes those deferred components I think probably majority of the time you just you never see them. >> Okay. Thank you. And Mark, let me ask you very, you know, very, very similar. Uh, a lot of federal changes happening right now at the federal level, lots of changes. What is currently happening in the M&A space? And I’d like to ask you to also answer that same question. When you see deals, how much cash as a percentage of this of the price, how much cash are you expecting? What kind
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of a range? And how much is an earnout or roll in, whatever that is? Yeah, I’ll answer the second question first. Um, our experience is similar to similar to Brian’s. We see it across the board. You know, in the same deal, we’ll see an allcash offer and sometimes we’ll see a a 50% cash and then an earnout. So, that’s why we want to go to multiple buyers um and get an auction process going. an example that um we had a couple years ago. It was an aer aerospace company and it was valued well
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it was a company doing about 15 million in revenue and we re went out to about 50 buyers and we ended up getting um about 12 initial offers and um the valuations that the buyers put on the company ranged from 12 million on the low end to 22 million on the higher end. And um I think the lower end one was about 75% cash. Um and the higherend one one was all cash. Uh so it just depends. Um so uh that’s why if we can we want to have multiple buyers in the process right up until we accept one to go
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forward with uh so that we can be pushing back and forth on each one. But occasionally, like Brian mentioned, you you end up with one buyer. You don’t tell them that they’re the only buyer. You make them feel like they have lots of competition. So, to try to keep them honest. Um, but uh, you know, then you have to work it from there. And again, like like Brian says, you have to see what’s going to work for sure. You know, you you know, what number does a client need for sure to retire on? And anything
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above that, if it happens, it happens. But if it doesn’t, they’re comfortable with what they received up front. Um, on your first question, you know, if you’d asked me that 90 days ago, uh, I I would
have said, well, we have, uh, an environment where looks like in inflation is waning. Uh, the prospects are good for lower interest rates and we have a businessfriendly administration coming in in into office. But uh you fast forward today uh to to today and uh we’ve had a couple of headwinds that
00:36:10
have come onto the horizon namely the tariffs and the stock market re reet along with looks like the rates are going to stay where they are at least for a little while. Yeah. >> So um my comment would be that’s created some uncertainty and most markets don’t like uncertainty. So, you know, I what what what I’d like to see is um gets another 90 days under under our belt. I think some of those things will work themselves out. Um but what we always say in any market, good companies, uh
00:36:44
trade at premiums and uh so uh we are actually taking a company in market in about two weeks and they’re um a good company and we expect just to have a good process there. But um you know um I think we’ve got some things uh in general that we have to work through right now. >> Okay. Okay. It makes me hearing what you said makes me think about co co is was scary and dark and ugly and some companies just did fantastic during that time. Others not so much and it was very very unknown.
00:37:19
It kind of seems a bit similar with the uncertainty that that is out there today. >> Correct. Correct. And you have to remember is that was 2020 and then you know uh March or April by the end end of the year uh our our our market was hot and 2021 was an all-time record in the M M&A business for both numbers of transactions and valuation. So um stay tuned. >> Yeah, we’ll we’ll see. We’ll see. So, a question a question that I’ll take here. The question is, how do you help an
00:37:58
owner navigate exit? Often when we meet an an owner, a business owner, and they’re thinking about exiting, they don’t understand what the value of the company is. They have an idea, but they’re not really sure. And they may have one good um one good member of their team. I shouldn’t say good member of the team. I should say they’ve got one person who is their go-to person. They rely on that person. And typically they’ve they’ve never sold a company before. That professional exit team is
00:38:28
different than their ongoing normal day-to-day business team. So the business attorney they have might have been fantastic for all that business activity all along the way, but when it comes to selling the company and understanding the letter of intent and the purchase sale agreement and all those things, Brian, that you talked about, they just don’t know what those are. So we help them. We help them understand the people who are on their team today. Often they don’t have that team yet. So we’ll help them build it.
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So we have to understand where are they? What is their business and we’ll help them bring on that investment banker. Maybe they need a a contract CFO for a time to get them a little stronger, get their numbers stronger before they’re ready to sell and we can recognize that as well for them. or they need a a tax CPA who can help them structure things over the next coming years or so they can have a a a lesser tax impact on that sale when the sale actually happens. So, we’re going to help them help you uh
00:39:31
build that team so that you have the right people on board who really understand exit and can help you navigate that in a way that is to your best interest when it’s all said and done. Brian, another question for you. Once seller and buyer agree on sales price and payment terms, we’re basically ready to close the deal, right? >> Yeah. Yeah. We we get them ahead of time. We’ve got letter of intent sign 10 million bucks, you know, all cash to close and let’s just get the documents
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done in the next two days and we’re good. So, you know, one of the things that uh I think clients are shocked by, particularly if it’s the only time they’ve been through the process is that, you know, the average purchase agreement uh in my experience, you know, spends about 20 25% of the time talking about how the seller is getting paid. And they say, “What’s the other 75%.” Well, that’s all the terms that allow the buyer to take back some or all that purchase price. And that, like I said,
00:40:34
surprises most people. and they say, “What what do you mean?” Well, you know, the buyer is going to go through its due diligence process, uh, which is a component, uh, but it also wants to make sure that the seller puts pen to paper and makes a whole host of representations and warranties about the company. They’re typically paying a, you know, a lot of money for that company and they want to know that what they’re buying is what they were told to expect. And so those provisions uh you know
00:41:00
again can you know go on for pages and pages and the company’s required to make statements about both the current status of the company historic status in a variety of areas. Uh the company was formed correctly kind of an easy one ranging to you’ve done all the things you’re supposed to do from an employment law perspective. You’ve done uh your customers are not ready to depart. you know, no one said they’re going to they’re going to go and and terminate that relationship in terms of your key
00:41:27
customers anytime soon. And it goes on for pages and pages. And then there’s a whole what we call an indemnification mechanism to trigger uh payback to the buyer of some or all the purchase price if these things turn out not to be true. And at the end of the day, it’s all about risk allocation. So, someone needs to bear the risk of both the known and the unknown liabilities. And the longer you’ve been in business, the more likely there is some unknown stuff out there. And so the the big part of that
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negotiation process is who bears that risk. And so, you know, the sellers think, I’m gonna get paid. I’m gonna go home and maybe I have a little transition period and I’m good. Not knowing that for years they may be on the hook to the buyer. And for lots of sellers, that’s pretty scary thought. We’ve had a lot of people say, “I’d rather just >> maybe shut down the company and after a couple good years then take on all this risk.” Now, there’s ways to mitigate the
00:42:16
risk that we can talk about, but I think that comes as a big surprise. And so that’s what creates a process as opposed to a you know it’s a couple couple of days now that we’ve got the um now that we’ve got the purchase price uh assigned. Uh you you got to go through the rest of that and make sure you’re comfortable uh on that postclosing risk profile. >> Yeah, there’s a lot there. There’s a lot to it. So it’s not just they’ve got the price, they’ve got the deal. Just draft
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it in two days and we’re done. No, it’s just you’re just getting started and that’s >> they they kind of complain about the lawyers and say, “Hey, you’re just in, you know, kind of holding up the process, but again, you’re you’re welcome to sign whatever you like.” We tell them it’s it’s it’s your company. You decide how much of that purchase price you want to put at risk postclosing. And then typically, they say, “Well, I don’t want to put any of
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it at risk.” Well, there’s going to be some at risk, but there’s ways to um to kind of derisk the deal, which we can talk about as well. But that’s an important part I think of the initial conversation. You know, when you you go to someone like Mark to talk about taking the company to market and you meet with your M&A uh legal team, uh I think that’s that’s, you know, part of the initial conversation. How much do you need to get out of this and how comfortable are you taking, you know,
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some of these post-closing risks? And if the answer is I don’t want to take any more risk than I need to. We’re very riskadverse. And that’s going to dictate a certain type of buyer, certain type of structure as opposed to someone else who has a, you know, a higher appetite for risk because, you know, whatever reason, they’ve got some uh some dollars in the bank or they just like taking risk and it’s okay with them. So, that’s a that’s an upfront question. >> Yeah. Okay. Thank you. And Mark, before
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I ask you this question, what you said a moment ago made me think about this. I had uh for our former governor Doug Ducey on our podcast about a year ago and he talked about taking Coldstone crearyy from the one little shop in Tempee across the globe and he got to a point where he he said he got to a point where where he realized it was probably about time to sell because of the family situation, young kids at home and he he just he wanted to be home and he said he was telling a colleague of his about
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that and the and the colleague said you need to talk with an investment banker and Doug said, “What’s that?” So, he had this company, but he’d never gone through a sale before, which is very common, right? So, people who are you who are listening and in part of this part of this uh this meeting today, don’t feel like you should know something or that you’re, you know, you’re just not on top of things. It’s very common to build a company, build it to great value, have a very complex
00:44:52
situation, be very intelligent, and do great things with it. But if you’ve never gone through exit before, you just don’t know what you don’t know. And that’s why it’s just so critical to talk with Mark Young here or Brian Bert or myself to have that conversation so that you don’t make mistakes that could be very very costly in this once in a-lifetime transaction. Mark, question for you. After your client has completed their sale, do they say anything to you like, “If I had it to do over again, I
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would do X.” >> Absolutely. Um the common theme um is is really two things. Um first they would have started sooner than they started in end into the process. That’s probably 90% of our clients or more say that I would have started sooner because I didn’t know what I didn’t know. And I feel like if I even started sooner I would have felt comfortable about the process. I could have maybe done some things that I wanted to do. It’s it’s it’s like when you wait closer and
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closer to some point in time, your options get eliminated because of time. The same thing with selling a business. So, first they say, you know, I wish I had started sooner. Um and the other thing that oftentimes were told is that they wished that they had invested more resources in their financial reporting and their financial metrics of their company. Uh because they see the benefit of those things for running their company but from oftentimes from the eyes of the buyer because the buyer are asking those types
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of questions. So if they would invested a little bit more in their financial reporting and done a little bit more work on their financial metrics um they would have done that. So those are the two things I think we hear most commonly. >> Okay. You’re saying they they tell you they wish they had started sooner and they wish they had better financials, better, cleaner, maybe more
accurate financial statements of financial reporting. >> Correct. >> Okay. Thank you. A question for me here.
00:47:10
Um, as a family CFO, what do you do after the sale to help the family? We help oversee all financial matters. We help coordinate their professional team. We help head off things before things become a problem. It’s often called issue spotting. Meaning, do you see something some kind of a gap in the system that could be detrimental to that family going forward as they want to live the rest of their lives? Um, we have to of course change that investment portfolio as as things change, as the economy changes, but also as life
00:47:44
changes. People often will set up a chunk of money for for the kids for college. Well, once they’re out of college, you don’t need that there anymore. At least not for your kids. Maybe somebody else’s, but not for yours. But having to keep up with all of that is part of what we’re doing after that sale so that they’ve still got that team and overseeing and looking out for them to make sure what we’re doing what they’re doing is what they should be doing. Because as an asset protection
00:48:11
attorney once uh he taught me this term. He said, “What is your target value?” I said, “Target value?” He says, “Yes, when you sell a company and now it’s all over the newspapers and magazines, people know now you suddenly have a big chunk of cash and you become a target. And if you’re bought by a public company that puts that price tag out there of what they bought you for, you are much more visible. You are much more of a target. And asset protection becomes extremely extremely critical. having the
00:48:43
right types of trusts, entities, and insurance so that now that you’re not in business anymore, your target value can can be a smaller number and you’ll be less visible to those who might try to sue you and and and and take away what you spent your lifetime attempting to build. So again, what do we do to help after the sale? We’re doing issue spotting. We often do a stress test every so often because even though everything is set up right now today and it looks perfect. Well, as Mark as you
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said in the last 90 days, things have changed a lot. So, it means revisiting those plans that might have been set up even just 60 days ago as the economy and that changes. Um, so Mark, another question for you. How long does it typically take to sell a company? >> Sure. Uh it it it certainly depends. It’s one of those questions that you answer it with the word depends and and it really depends on how ready the company is to go to market um and how or organized their books are. The industry average is 8 to nine months
00:49:54
from the time that an engagement is signed and a transaction is closed. Um, sometimes it’s longer than that, sometimes it’s less than that, but it really depends on how well the company is structured from a bookkeeping, uh, recordkeeping process. Um, as both Brian and Armando know, we spend a lot of time upfront before we go to market with our clients to make sure that we’ve got those ducks uh in in the road the best we can. um not o only to facilitate a timely close but also as Brian said um
00:50:32
if if there’s any issues we want to find them we don’t want the buyers to find them when they’re in due diligence. So, we spent a lot of time with that. Uh to the point that uh that we actually with Brian’s help a couple years ago, we closed a transaction basically in four months and it was 30 days from signing the letter of intent to close. And uh that was on on the uh short side. We’d never say we could do that again, but that was the hard work that was done before we went to market there. Uh but
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again the in industry average is 8 to nine months. We tend to close our transactions in six to seven months. >> Okay. Thank you. And do you see that changing at all given just the environment that we’re in today or would you expect about the same? >> Well, when there’s uncertainty, um buyers will sometimes drag their feet because they want to know they want more clarity on their crystal ball. So they’ll sometimes drag their feet. So yes, um uh that can um impact things. Um, but again, um, if you run a process
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and you’ve got a second and third place bidder, uh, you just keep reminding them, um, that, uh, if they don’t move forward in a timely fashion, there’s others that are interested and your deal might not have been the best deal, but they seem to like you, but they might not like you anymore if you’re starting to drag your feet. So, just little ways to keep the process going forward. Okay, thank you. Uh, Brian, a question for you. How can a seller mitigate post-closing risk and avoid having to
00:52:17
look over their shoulder for years to come? They want to get a clean break and be done with the company if the decision is made to sell. How do they not have things coming after them after the fact? >> Yeah. So, a few ways. I mean, one is just to let the buyers know upfront that that’s the expectation, right? create the expectation uh in the uh initial process, the initial outreach that hey that’s the type of deal that they want to do and and kind of attract buyers willing to uh to kind of play on those
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terms. Second, there’s a there’s a great new tool that’s uh been used historically, it’s been out there, but really in the recent years, last two three years, it’s really become prevalent, and that’s representation and warranty insurance, which is essentially an opportunity if done correctly and the deal structure correctly, can kind of derisk the deal. It’s never zero, but the most likely causes of having the seller to give back money to the buyer uh typically can get eliminated. then
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you you put a little bit of dollars at risk which typically is a maybe it’s a half percent of purchase price for example as opposed to putting you know 10 or 20% of the purchase price at risk for the most likely areas of concern and so that’s a huge difference and we say hey assume you’re not getting that maybe half percent back but you paid that’s kind of your contribution to be able to sleep at night. Now the rep and warranty insurance can’t cover all deals. There’s deals that are kind of too small. Uh
00:53:40
although in recent days we’ve seen uh carriers be willing to insure deals much smaller than they used to. It used to be kind of 10 million or more. We’ve seen some deals where and we’ve got one frankly in the in the queue here where they’re going to insure a deal that’s uh that’s substantively less than that. So uh depending on the willingness to to kind of pay the insurance premium which typically the buyer does uh with with some exceptions uh that’s a great tool that’s again only in recent years become
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pretty prominent. The final way is just to have, you know, good legal counsel to be able to negotiate and let let the seller know what’s what’s standard, what’s market, because the buyer is going to almost inev inevitably come back with a a pretty buyer friendly LOI or buyer friendly draft. And, you know, without good instruction on what standard, you know, sellers are going to be at a at a disadvantage thinking, hey, that’s what I got to agree to if I’m going to sell this company. And there’s lots of
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ways to reduce that risk in terms of caps and baskets and all sorts of technical tools that go into that purchase agreement to kind of carve back the uh the buyer’s ability to uh to claw back that purchase price. >> Yeah, thank you. I’m glad you said I’m glad you mentioned Reps and Warranties Insurance on our podcast. We interviewed a company that provides that. had an hour conversation with them about what that means to the seller, why they would want to do it, what are the what
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precautions are there. And speaking of the podcast that we have, you know, both, you know, Brian, yourself, Mark have both been guests on that podcast. So, you know, listener who’s here with us right now, if you like what you’re hearing from both Brian and from Mark, you can have a whole hour of meet us asking them questions and having a conversation with them about their expertise and you’ll get a lot of fantastic fantastic information from that conversation. So, I’ve got another
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question that I’ll take for myself here. The question is, after the sale, how do you invest monies to create that their new paycheck? And I’ll I’ll use a quick example. A 50-year-old and a 70-year-old might both want to get a paycheck once they sell their company of $30,000 a month. But at age 50 and age 70, this is a good point to mention that life expectancy for a man is age 74. For a woman, age 78. So if you’re normal in average and life expectancy is is short for that 70-year-old, that portfolio allocation
00:56:00
may be completely different to generate that same $30,000 a month of cash that each of those people is looking for. So the way we can get that new paycheck for them, we will look at uh stock that produces dividends. uh we can look at investment grade bonds sometimes US treasuries sometimes municipal bonds because those can provide st taxfree income in your state we can also look at annuities and we can look at other other vehicles as well but I’ll mention that study after study after study shows that
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the happiest retirees are those who have a steady consistent paycheck during their retirement from whatever source that is but a steady consistent paycheck is what makes for the happiest retirees. And I mentioned just quickly, we’re going to have a special offer here. We’re getting really close on time. Brian, quick in 30 seconds, your last recommendations, suggestions, advice for the founders on this call. >> Sure. No, I think the uh the best advice what we already mentioned, which is to
00:57:03
to put your team in place early on. And from a legal standpoint, you know, we do lots of what we call legal audits to kind of come in and kick the tires when the company is even thinking about selling or sooner. um and just kind of see where you’re at and there’s always lots of things to clean up, lots of issues to address. Um and so I’d encourage folks to uh you know take advantage of that opportunity happy to chat with folks about that. But that’ll give you a sense of, you know, where you
00:57:28
are in the process, where you need to be, where, as Mark talked about as well, from the business standpoint, maybe you need to grow to get to the number that you’re looking for, and understanding, you know, what it takes to get to that multiple and that end end sale price. And just understanding some of the other terms that we’ve talked about in terms of, you know, deferred purchase price, risk profile, you know, what’s it look like to to sell your your baby as you mentioned earlier, um, and are you ready
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to do that? So, it kind of brings all these things to a head and and again, I I’d encourage folks to kind of go through uh that process uh as as soon as possible, even if even if you’re not thinking about selling quite yet. >> Right. >> Y a lot of good information. >> Right. Exactly. And then Mark, before I get to you, I just put in the chat room in the chat there. Uh we have a a white paper that we’ve done from our prior Scotty founder forum events. We’ve had over 150 founders come to our events.
00:58:18
Their number one question consistently has been, “What is my company worth?” And I put in the chat a link there. If you’d like to know what that is, we offer a business valuation service. It’s a $5,000 value. We’re offering it today for people on this call for $9.97. It’s got to get booked by 5:00 p.m. on Saturday. There’s a link there to do that. Uh if you’d like to take advantage of that, please go ahead and do that. Mark, in 30 seconds or less, your your last advice to the founders listening
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who’ve not gone through an exit and they’d like to hear your last 30 seconds. >> 30 seconds. That simple. If you’re thinking of selling your company in the next three to five years, start now. Kind of like what Brian said, start building your team. Start having discussions so you can eliminate issues that may arise if you were tried to sell the company. So start sooner than later and get started now. >> Fantastic. Thank you. Excellent. And then from my perspective, I would say
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the same thing. Start now. Plan and get a get an idea and a plan together for your your overall wealth management plan for the family. And don’t forget to look at the value of the company and do what you can to help lock down that value as best you can. And when I say that, I’m thinking about the right type of entity, the right types of tax structure, the right types of trusts for the family, having everything titled correct, the right types of insurance on everything. So, with that, I’ll go ahead and uh
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begin to to close this now. And what I’d say is um uh one quick thing that at the Scotty found for events, this is all about you and about your exit. And imagine it’s the day after you close on your sale. You don’t have any employee issues, no customer complaints, no payroll to work with or deal with because it’s done. You are done with your company. The coffee smells great. The birds are chirping. It’s a bright sunny blue day and you feel fantastic. Why? because that’s what’s possible when you implement the
01:00:29
concepts and the strategies and ideas that we talked about today in this session. I hope you found this helpful and this concludes our spring Scottdale founders forum. Make it a great day. >> Thank you >> Ryan and Mark. Thank you so much for your time. Really appreciate your expertise. You guys are just phenomenal. I’m so grateful that you are here in the valley and that you help the people that you do with your expertise. Thank you for that. >> Thanks for having me. >> Thanks.
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Thank you.
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